Chapter 17: Financial Statement Analysis
109.
The particular analytical measures chosen to analyze a company may be influenced by all of the following except
a.
industry type
b.
capital structure
c.
diversity of business operations
d.
product quality or service effectiveness
110.
Which of the following is not a characteristic evaluated in ratio analysis?
a.
liquidity
b.
profitability
c.
solvency
d.
marketability
111.
Short-term creditors are typically most interested in analyzing a company’s
a.
marketability
b.
profitability
c.
operating results
d.
solvency
Chapter 17: Financial Statement Analysis
112.
A common measure of liquidity is
a.
the ratio of sales to assets
b.
dividends per share of common stock
c.
the accounts receivable turnover
d.
the profit margin
113.
Richards Corporation had net income of $250,000 and paid dividends to common stockholders of $50,000. It had
50,000 shares of common stock outstanding during the entire year. Richards Corporation’s common stock is
selling
for $35 per share. The price-earnings ratio is
a.
7 times
b.
14 times
c.
2 times
d.
5 times
114.
Leverage implies that a company
a.
contains debt financing
b.
contains equity financing
c.
has a high current ratio
d.
has a high earnings per share
Chapter 17: Financial Statement Analysis
The following information pertains to Diane Company. Assume that all balance sheet amounts represent both
average and ending balance figures and that all sales were on credit.
Assets
Cash and short-term investments
$ 30,000
Accounts receivable (net)
20,000
Inventory
15,000
Property, plant, and equipment
185,000
Total assets
$250,000
Liabilities and Stockholders’ Equity
Current liabilities
$ 45,000
Long-term liabilities
70,000
Stockholders’ equity—Common
135,000
Total liabilities and stockholders’ equity
$250,000
Income Statement
Sales
$ 85,000
Cost of goods sold
45,000
Gross margin
$ 40,000
Operating expenses
(15,000)
Interest expense
(5,000)
Net income
$ 20,000
Number of shares of common stock outstanding
Market price of common stock
Total dividends paid
Cash provided by operations
115.
What is the ratio of sales to total assets for Diane Company?
a. 1.00
b. 2.94
c. 0.18
d. 0.34
Chapter 17: Financial Statement Analysis
116.
What is the rate earned on total assets for Diane Company?
a. 10.0%
b. 8.0%
c. 0.10%
d. 1.0%
117.
What are the dividends per common share for Diane Company?
a. $20.00
b. $3.00
c. $0.67
d. $1.50
118.
What is the dividend yield for Diane Company?
a. 7.5%
b. 0.75%
c. 13.3%
d. 1.3%
Chapter 17: Financial Statement Analysis
119.
What is the rate earned on common stockholders’ equity for Diane Company?
a. 6.75%
b. 14.8%
c. 7.4%
d. 13.5%
120.
What is the price earnings ratio for Diane Company?
a.
8.0 times
b.
2.5 times
c.
4.0 times
d.
6.0 times
Chapter 17: Financial Statement Analysis
121.
The following information pertains to Newman Company. Assume that all balance sheet amounts represent
both
average and ending balance figures and that all sales were on credit.
Assets
Cash and short-term investments
$ 40,000
Accounts receivable (net)
30,000
Inventory
25,000
Property, plant, and equipment
215,000
Total Assets
$310,000
Liabilities and Stockholders’ Equity
Current liabilities
$ 60,000
Long-term liabilities
95,000
Stockholders’ equity—Common
155,000
Total liabilities and stockholders’ equity
$310,000
Income Statement
Sales
$90,000
Cost of goods sold
45,000
Gross margin
$45,000
Operating expenses
20,000
Net income
$25,000
Number of shares of common stock
6,000
Market price of common stock
$40
Dividends per share
$1.00
Cash provided by operations
$40,000
What is the rate earned on total assets for this company?
a. 8.1%
b. 6.8%
c. 10.5%
d. 16.1%
Chapter 17: Financial Statement Analysis
122. The following information pertains to Dallas Company. Assume that all balance sheet amounts represent both
average and ending balance figures and that all sales were on credit.
Assets
Cash and short-term investments
$ 40,000
Accounts receivable (net)
30,000
Inventory
25,000
Property, plant, and equipment
280,000
Total assets
$375,000
Liabilities and Stockholders’ Equity
Current liabilities
$ 60,000
Long-term liabilities
95,000
Stockholders’ equity—Common
220,000
Total liabilities and stockholders’ equity
$375,000
Income Statement
Sales
$90,000
Cost of goods sold
45,000
Gross margin
$45,000
Operating expenses
15,000
Net income
$30,000
Number of shares of common stock
6,000
Market price of common stock
$20
Dividends per share
$1.00
Cash provided by operations
$40,000
What is the rate earned on stockholders’ equity?
a. 7.3%
b. 13.6%
c. 20.5%
d. 40.9%
Chapter 17: Financial Statement Analysis
123.
A company reports the following:
Net income
$160,000
Preferred dividends
$10,000
Shares of common stock outstanding
20,000
Market price per share of common stock
$35
The company’s earnings per share on common stock is
a. $13.33
b. $8.50
c. $7.50
d. $35.00
124.
Corporate annual reports typically do not contain
a.
management discussion and analysis
b.
an SEC statement expressing an opinion
c.
accompanying notes
d.
an auditor’s report
Chapter 17: Financial Statement Analysis
125.
The independent auditor’s report
a.
describes which financial statements are covered by the audit
b.
gives the auditor’s opinion regarding the fairness of the financial statements
c.
summarizes what the auditor did
d.
states that the financial statements were presented on time
126.
The purpose of an audit is to
a.
determine whether or not a company is a good investment
b.
render an opinion on the fairness of the statements
c.
determine whether or not a company complies with corporate social responsibility
d.
determine whether or not a company is a good credit risk
127.
Which of the following is required by the Sarbanes-Oxley Act?
a.
a price-earnings ratio
b.
a report on internal control
c.
a vertical analysis
d.
a common-sized statement
Chapter 17: Financial Statement Analysis
128.
All of the following are typically included in the management’s discussion and analysis in annual reports except
a.
explanations of any significant changes between the current and prior years’ financial statements
b.
management’s assessment of liquidity
c.
journal entries
d.
off-balance-sheet arrangements
129.
Which of the following would appear as an extraordinary item on the income statement?
a.
loss resulting from the sale of fixed assets
b.
gain resulting from the disposal of a segment of the business
c.
loss from land condemned for public use
d.
liquidating dividend
130.
A loss on disposal of a segment would be reported in the income statement as a(n)
a.
administrative expense
b.
other expense
c.
deduction from income from continuing operations
d.
selling expense
Chapter 17: Financial Statement Analysis
131.
An extraordinary item can result from
a.
a segment of the business being sold
b.
corporate income tax being paid
c.
a change from one accounting method to another acceptable accounting method
d.
a transaction or event that is unusual and occurs infrequently
132.
Which of the following is considered an unusual item affecting the prior period’s income statement?
a.
a change in accounting principles
b.
fixed asset impairments
c.
an extraordinary item
d.
discontinued operations
133.
Which of the following should be classified as an extraordinary item on the income statement?
a.
gain on a sale of a long-term investment
b.
loss due to discontinued operations
c.
restructuring charges
d.
loss resulting from an infrequent natural disaster
Chapter 17: Financial Statement Analysis
134.
A loss due to a discontinued operation should be reported on the income statement
a.
above income from continuing operations
b.
without related tax effect
c.
below income from continuing operations
d.
as an operating expense
135.
A change from one acceptable accounting method to another is reported
a.
on the statement of retained earnings, as a correction to the beginning balance
b.
on the income statement, below income from continuing operations
c.
on the income statement, above income from continuing operations
d.
through a retroactive restatement of prior-period earnings
136.
Which of the following items should be classified as an extraordinary item on an income statement?
a.
gain on the retirement of a bond payable
b.
loss from hurricane damage in Iowa
c.
loss due to a discontinued operation in Colorado
d.
selling treasury stock for more than the company paid for it
Chapter 17: Financial Statement Analysis
137.
Which of the following items appear on the corporate income statement before income from continuing operations?
a.
cumulative effect of a change in accounting principle
b.
income tax expense
c.
extraordinary gain
d.
loss on discontinued operations
138.
Cash and accounts receivable for Adams Company are provided below:
Current Year
Prior Year
Cash
$70,000
$50,000
Accounts receivable (net)
70,400
80,000
What is the amount and percentage of increase or decrease that would be shown with horizontal analysis?
Chapter 17: Financial Statement Analysis
139.
The following items were taken from the financial statements of Tilden, Inc., over a three-year period:
Item
Year 3
Year 2
Year 1
Sales
$360,000
$335,000
$290,000
Cost of goods sold
225,000
205,000
185,000
Gross profit
$135,000
$130,000
$105,000
Compute the following for each of the above time periods.
(a)
The amount and percentage change from Year 2 to Year 3.
(b)
The amount and percentage change from Year 1 to Year 2.
Round percentages to one decimal place.
Sales
Cost of goods sold
Gross profit
Chapter 17: Financial Statement Analysis
140.
Comparative information taken from the Friction Company’s financial statements is shown below:
Year 2
Year 1
(a)
Notes receivable
$ 10,000
$ 0
(b)
Accounts receivable
106,200
90,000
(c)
Retained earnings
30,000
(40,000)
(d)
Sales
654,000
600,000
(e)
Operating expenses
160,000
200,000
(f)
Income taxes payable
28,000
20,000
Using horizontal analysis, show the percentage change and direction (increase or decrease) from Year 1 to Year 2
with Year 1 as the base year.
Chapter 17: Financial Statement Analysis
141.
Revenue and expense data for Young Technologies are as follows:
Year 2
Year 1
Sales
$500,000
$440,000
Cost of goods sold
325,000
242,000
Selling expense
70,000
79,200
Administrative expenses
75,000
70,400
Income tax expense
10,500
16,400
(a)
Prepare an income statement in comparative form, stating each item for both years as an
amount and as a percent of sales. Round to the nearest whole percent.
(b)
Comment on the significant changes disclosed by the comparative income statement.
Chapter 17: Financial Statement Analysis
142.
Cash and accounts receivable for Ashfall Co. are provided below:
Current Year
Prior Year
Cash
$62,400
$58,000
Accounts receivable (net)
42,000
50,000
Based on this information, what is the amount and percentage of increase or decrease that would be shown on a
balance sheet with horizontal analysis?
143.
Income statement information for Lucy Company is provided below:
Sales
$175,000
Cost of goods sold
105,000
Gross profit
$ 70,000
Prepare a vertical analysis of the income statement for Lucy Company.
Chapter 17: Financial Statement Analysis
144.
Why would you or why wouldn’t you compare an organization like Ford Motor Company to the local car
dealer
“Johnson City Ford/Lincoln/Mercury” in vertical and horizontal analysis?
Chapter 17: Financial Statement Analysis
145.
The balance sheet data of Randolph Company for two recent years appears below:
(a)
Using horizontal analysis, show the percentage change for each balance sheet
item
using Year 1 as a base year.
(b)
Using vertical analysis, prepare a comparative balance sheet.
Round percentages to one decimal place.
(a)
(Decrease)
Current assets
Plant assets
Total assets
Current liabilities
Long-term debt
Common stock
Retained earnings
Assets:
Year 2
Year 1
Current assets
$ 440
$280
Plant assets
675
520
Total assets
$1,115
$800
Liabilities and stockholders’ equity:
Current liabilities
$ 280
$120
Long-term debt
250
160
Common stock
325
320
Retained earnings
260
200
Total liabilities and stockholders’ equity
$1,115
$800
Chapter 17: Financial Statement Analysis